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Endogenous Labor Market Participation and the Business Cycle

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  • Haefke, Christian

    (New York University, Abu Dhabi)

  • Reiter, Michael

    (IHS - Institute for Advanced Studies, Vienna)

Abstract

Existing models of equilibrium unemployment with endogenous labor market participation are complex, generate procyclical unemployment rates and cannot match unemployment variability relative to GDP. We embed endogenous participation in a simple, tractable job market matching model, show analytically how variations in the participation rate are driven by the cross-sectional density of home productivity near the participation threshold, and how this density translates into an extensive-margin labor supply elasticity. A calibration of the model to macro data not only matches employment and participation variabilities but also generates strongly countercyclical unemployment rates. With some wage rigidity the model also matches unemployment variations well. Furthermore, the labor supply elasticity implied by our calibration is consistent with microeconometric evidence for the US.

Suggested Citation

  • Haefke, Christian & Reiter, Michael, 2006. "Endogenous Labor Market Participation and the Business Cycle," IZA Discussion Papers 2029, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp2029
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    References listed on IDEAS

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    Cited by:

    1. Lechthaler, Wolfgang & Ring, Patrick, 2021. "Labor force participation, job search effort and unemployment insurance in the laboratory," Journal of Economic Behavior & Organization, Elsevier, vol. 189(C), pages 748-778.
    2. Mathan Satchi & Jonathan Temple, 2006. "Growth and labour markets in developing countries," Bristol Economics Discussion Papers 06/581, School of Economics, University of Bristol, UK.
    3. Bertinelli, Luisito & Cardi, Olivier & Sen, Partha, 2013. "Deregulation shock in product market and unemployment," Journal of Economic Dynamics and Control, Elsevier, vol. 37(4), pages 711-734.
    4. Martin Janíčko & Ashot Tsharakyan, 2013. "K udržitelnosti průběžného důchodového systému v kontextu stárnutí populace v České republice [Note on the Sustainability of the Pay-As-You-Go Pension Scheme in the Context of Population Ageing in ," Politická ekonomie, Prague University of Economics and Business, vol. 2013(3), pages 321-337.
    5. Haefke, Christian & Reiter, Michael, 2011. "What Do Participation Fluctuations Tell Us About Labor Supply Elasticities?," IZA Discussion Papers 6039, Institute of Labor Economics (IZA).
    6. Moon, Weh-Sol, 2011. "Endogenous labor force participation and firing costs," Labour Economics, Elsevier, vol. 18(5), pages 607-623, October.
    7. Alexander Ludwig & Michael Reiter, 2010. "Sharing Demographic Risk--Who Is Afraid of the Baby Bust?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(4), pages 83-118, November.
    8. Shigeru Fujita & Garey Ramey, 2007. "Reassessing the Shimer facts," Working Papers 07-2, Federal Reserve Bank of Philadelphia.
    9. Stephen Byrne & Martin D. O’Brien, 2017. "Understanding Irish Labour Force Participation," The Economic and Social Review, Economic and Social Studies, vol. 48(1), pages 27-60.
    10. Nicolas Petrosky-Nadeau, 2014. "Credit, Vacancies and Unemployment Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 191-205, April.
    11. Morten O. Ravn, 2008. "The Consumption-Tightness Puzzle," NBER Chapters, in: NBER International Seminar on Macroeconomics 2006, pages 9-63, National Bureau of Economic Research, Inc.
    12. Matteo Lanzafame, 2010. "The endogeneity of the natural rate of growth in the regions of Italy," International Review of Applied Economics, Taylor & Francis Journals, vol. 24(5), pages 533-552.
    13. Mathan Satchi & Jonathan Temple, 2009. "Labor Markets and Productivity in Developing Countries," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 183-204, January.
    14. Mark Bils & Yongsung Chang & Sun-Bin Kim, 2008. "Heterogeneity and Cyclical Unemployment," RCER Working Papers 543, University of Rochester - Center for Economic Research (RCER).
    15. Monique Ebell, 2008. "Resurrecting the Participation Margin," CEP Discussion Papers dp0873, Centre for Economic Performance, LSE.
    16. Moon, Weh-Sol, 2008. "Explaining the Joint Behavior of Employment, Unemployment and Nonparticipation," MPRA Paper 10583, University Library of Munich, Germany, revised May 2008.
    17. Ebell, Monique, 2011. "On the cyclicality of unemployment: Resurrecting the participation margin," Labour Economics, Elsevier, vol. 18(6), pages 822-836.
    18. Ekkehard Ernst & Uma Rani, 2011. "Understanding unemployment flows," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 27(2), pages 268-294.
    19. Kónya, István & Jakab M., Zoltán, 2012. "Munkapiaci súrlódások DSGE modellekben [Labour market frictions in DSGE models]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 933-962.
    20. Alexander Ludwig & Michael Reiter, 2008. "Sharing Demographic Risk – Who is Afraid of the Baby Bust?," MEA discussion paper series 08166, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    21. Alon Binyamini & Tali Larom, 2012. "Encouraging Participation in a Labor Market with Search and Matching Frictions," Bank of Israel Working Papers 2012.11, Bank of Israel.
    22. Bachmann, Ronald & Bechara, Peggy & Kramer, Anica & Rzepka, Sylvi, 2014. "A Study on Labour Market Transitions Using Micro-data from the Statistics on Income and Living Conditions (SILC). Final Report," RWI Projektberichte, RWI - Leibniz-Institut für Wirtschaftsforschung, number 111484, March.
    23. Matteo Lanzafame, 2009. "Is Regional Growth in Italy Endogenous?," Regional Studies, Taylor & Francis Journals, vol. 43(8), pages 1001-1013.

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    More about this item

    Keywords

    matching models; labor market participation; labor supply elasticity; time aggregation;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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